HISTORY OF MUTUAL FUNDS IN INDIA
Mutual funds were first introduced in India in 1963 with the formation of the Unit Trust of India (UTI). UTI was set up by the Reserve Bank of India and functioned as a public sector mutual fund. Its main objective was to encourage savings and channel them into productive investments. Initially, UTI launched two schemes – Unit Scheme 1964 (US 64) and Unit Scheme 1964 (US 64-II).
In 1987, public sector banks and financial institutions were allowed to set up mutual funds. The first public sector mutual fund, SBI Mutual Fund, was launched in 1987. In the same year, Canbank Mutual Fund, the first non-public sector mutual fund, was also launched.
The Securities and Exchange Board of India (SEBI) was established in 1992 and became the regulatory body for mutual funds in India. SEBI regulates the mutual fund industry and ensures that mutual funds are managed in the best interests of the investors.
In 1993, the first private sector mutual fund, Kothari Pioneer Mutual Fund (now merged with Franklin Templeton Mutual Fund), was launched. The private sector entry led to an increase in the number of mutual fund schemes, and investors had a wider choice of investment options.
Over the years, the mutual fund industry in India has grown significantly, with the launch of several mutual fund schemes, increased participation from retail investors, and the introduction of innovative products such as exchange-traded funds (ETFs) and index funds.
Today, there are several mutual fund companies operating in India, including both domestic and foreign players. The mutual fund industry in India continues to evolve, and new products and services are being introduced to cater to the changing needs of investors.
Table of Contents
INTRODUCTION TO MUTUAL FUND
Mutual funds are investment vehicles that pool money from a large number of investors to purchase a diversified portfolio of stocks, bonds, or other securities. The funds are managed by professional fund managers, who invest the pooled money in accordance with the investment objective of the fund.
Investing in mutual funds allows individual investors to gain exposure to a diversified portfolio of securities, which may be difficult or costly to achieve on their own. By pooling their money with other investors, mutual fund investors can benefit from economies of scale in transaction costs and management fees.
Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and are available in a variety of types, including equity funds, debt funds, hybrid funds, index funds, and more. Each type of mutual fund has its own investment objective, risk profile, and fee structure.
Investors can buy or sell mutual fund units on any business day at the Net Asset Value (NAV) of the fund, which is calculated daily based on the current market value of the fund’s portfolio. Mutual funds offer a convenient and relatively low-cost way for investors to participate in the financial markets and achieve their investment goals.
HOW A MUTUAL FUND WORKS ?
Here is a step-by-step overview of how a mutual fund works:
The mutual fund collects money from investors by selling units of the fund, and the money is pooled together to create a large sum of money.
The fund manager uses this money to buy a diversified portfolio of securities such as stocks, bonds, or other assets, in accordance with the investment objective of the fund.
The performance of the mutual fund is determined by the performance of the underlying securities in the portfolio. If the value of the securities in the portfolio increases, the value of the mutual fund units will also increase.
Investors can buy or sell mutual fund units on any business day at the Net Asset Value (NAV) of the fund, which is calculated based on the current market value of the fund’s portfolio.
The mutual fund charges fees and expenses for managing the fund, which are deducted from the NAV of the fund. The most common fees include management fees, operating expenses, and transaction costs.
The fund manager is responsible for monitoring the performance of the securities in the portfolio and making changes as needed to achieve the investment objective of the fund.
TYPE OF MUTUAL FUND SCHEMES
There are various types of mutual fund schemes available for investors in India. Here are some of the most common types of mutual fund schemes:
Equity Funds: These funds invest primarily in stocks or equity shares of companies. They are suitable for investors who are willing to take a higher level of risk in order to earn potentially higher returns over the long term.
Debt Funds: These funds invest in fixed income securities such as bonds, government securities, and other debt instruments. They are suitable for investors who are looking for regular income and capital preservation.
Hybrid Funds: These funds invest in a combination of equity and debt instruments, and their allocation between the two can vary based on market conditions and the fund manager’s outlook. They are suitable for investors who want a balanced portfolio with a mix of equity and debt.
Index Funds: These funds invest in stocks or other securities that are part of a specific market index, such as the Nifty 50 or the BSE Sensex. They are designed to replicate the performance of the index and are suitable for investors who want to invest in the broader market.
Exchange-Traded Funds (ETFs): These are similar to index funds, but they are traded on stock exchanges like a stock. They offer the convenience of stock trading with the diversification of a mutual fund.
Sectoral/Thematic Funds: These funds invest in specific sectors or themes, such as technology or healthcare. They are suitable for investors who want exposure to a specific area of the market.
Tax Saving Funds: These funds offer tax benefits under Section 80C of the Income Tax Act, and the investments made in these funds are eligible for a deduction from taxable income up to a certain limit.
Investors should carefully consider their investment objectives, risk tolerance, and investment horizon before choosing a mutual fund scheme. They should also carefully review the fund’s past performance, expense ratio, and portfolio composition before making an investment decision.
Mutual funds are ideal for investors who –
- lack the knowledge or skill / experience of investing in stock markets directly.
- want to grow their wealth, but do not have the inclination or time to research the stock market.
- wish to invest only small amounts.
WHY INVEST IN MUTUAL FUNDS ?
Here are some reasons why investors may choose to invest in mutual funds:
Diversification: One of the primary benefits of investing in mutual funds is that they offer diversification, which means investors can invest in a variety of securities without having to purchase them individually. This diversification helps to reduce the overall risk of the investment.
Professional Management: Mutual funds are managed by professional fund managers who use their expertise to invest the money in accordance with the investment objective of the fund. This can be particularly beneficial for investors who do not have the time, knowledge, or experience to manage their own investments.
Convenience: Investors can purchase or sell mutual fund units on any business day at the Net Asset Value (NAV) of the fund, which is calculated based on the current market value of the fund’s portfolio. This provides a high level of convenience for investors who may not have the time or resources to monitor their investments on a daily basis.
Flexibility: Mutual funds are available in a wide range of types, such as equity funds, debt funds, hybrid funds, index funds, and more. Each type of mutual fund has its own investment objective, risk profile, and fee structure, which allows investors to choose a fund that aligns with their specific investment goals and risk tolerance.
Low Cost: Mutual funds are a relatively low-cost way for investors to participate in the financial markets and achieve their investment goals. The fees and expenses associated with mutual funds are generally lower than those associated with other types of investment vehicles such as individual stocks, bonds, or exchange-traded funds.
Overall, mutual funds can be a convenient and relatively low-cost way for investors to build a diversified portfolio and achieve their investment goals. However, it’s important for investors to carefully consider the investment objective, risk profile, and fees associated with each fund, as well as their own investment goals and risk tolerance. They should also ensure that the mutual fund is managed by a reputable and experienced fund manager.
WHAT ARE RISK IN MUTUAL FUND ?
Like any investment, mutual funds carry a certain degree of risk. Here are some of the risks associated with mutual funds:
Market Risk: The value of a mutual fund’s portfolio can fluctuate due to changes in market conditions, such as economic trends, political events, or global crises. This type of risk is inherent in investing in stocks, bonds, or other securities.
Credit Risk: Mutual funds that invest in bonds or other debt securities are subject to credit risk, which is the risk of the issuer defaulting on its debt obligations. If a bond issuer defaults, the value of the bond and the mutual fund’s investment in that bond could decline.
Interest Rate Risk: Mutual funds that invest in fixed-income securities are subject to interest rate risk, which is the risk that changes in interest rates will cause the value of the fund’s investments to decline. When interest rates rise, the value of fixed-income securities generally declines, and vice versa.
Liquidity Risk: Some mutual funds invest in securities that may be difficult to sell quickly or at a reasonable price. This type of risk is known as liquidity risk and can cause the mutual fund’s value to decline if investors want to sell their units but cannot do so easily.
Manager Risk: Mutual funds are managed by fund managers who make investment decisions on behalf of the investors. If the fund manager makes poor investment decisions or if the manager leaves the fund, the performance of the fund could suffer.
Currency Risk: Mutual funds that invest in securities denominated in foreign currencies are subject to currency risk, which is the risk that changes in exchange rates will affect the value of the fund’s investments.
It’s important for investors to carefully consider the risks associated with each mutual fund they are considering investing in and to ensure that the fund’s investment objective and risk profile align with their own investment goals and risk tolerance. They should also consult with a financial advisor to help them make informed investment decisions.
HOW TO INVEST IN A MUTUAL FUND ?
Investing in a mutual fund is relatively easy and can be done through the following steps:
Determine your investment goals: Before investing in a mutual fund, it’s important to determine your investment goals, such as your investment horizon, risk tolerance, and financial objectives.
Choose the right mutual fund: Once you have determined your investment goals, choose a mutual fund that aligns with those goals. You can do this by researching the different mutual funds available and assessing their past performance, fees, and investment strategies.
Open a mutual fund account: To invest in a mutual fund, you need to have a mutual fund account. You can open a mutual fund account either directly with the fund house or through a registered online investment platform.
Complete the necessary paperwork: You will need to fill out a mutual fund application form and provide your Know Your Customer (KYC) details, such as your PAN card, Aadhaar card, and bank account details.
Invest in the mutual fund: Once your mutual fund account is set up and the necessary paperwork is complete, you can invest in the mutual fund by transferring the desired amount to the mutual fund account. You can invest either through a lump sum investment or a systematic investment plan (SIP).
Monitor your investment: It’s important to monitor your investment regularly and assess whether the mutual fund is performing in line with your investment goals. You should also review the fund’s performance periodically and make any necessary adjustments to your investment portfolio.
It’s important to note that investing in mutual funds carries certain risks and investors should assess their risk tolerance before investing. It’s advisable to consult with a financial advisor before making any investment decisions.
WHAT IS SYSTEMATIC INVESTMENT PLAN - SIP ?
Systematic Investment Plan (SIP) is a method of investing in mutual funds where an investor can invest a fixed amount of money at regular intervals (usually monthly) in a selected mutual fund scheme. SIP is a disciplined approach to investing, where the investor can invest a small amount of money regularly over a long period of time and benefit from the power of compounding.
SIPs are a popular investment option for retail investors who want to invest in mutual funds but may not have a lump sum amount to invest. By investing a fixed amount every month, investors can build a sizable investment portfolio over time.
SIPs provide several benefits to investors, such as:
Disciplined investing: SIPs encourage disciplined investing by helping investors to stick to a regular investment plan.
Convenience: Investors can automate their investments through a standing instruction to their bank, making it a hassle-free process.
Rupee-cost averaging: By investing a fixed amount every month, investors can benefit from rupee-cost averaging, which helps to mitigate the effects of market volatility.
Power of compounding: SIPs provide the benefits of compounding, which can help investors to build wealth over the long term.
Investors can start investing in SIPs with a minimum amount, which varies from fund to fund. SIPs are available for most mutual fund schemes, including equity funds, debt funds, and hybrid funds.
MYTHS & FACTS ABOUT MUTUAL FUNDS
Myths about mutual funds:
Mutual funds are risky: While mutual funds are subject to market risk, they offer diversification and are managed by professional fund managers who invest in a diversified portfolio of stocks and bonds to minimize risk.
Mutual funds are only for the rich: Mutual funds can be bought for as little as a few hundred rupees, making it an affordable investment option for retail investors.
Mutual funds are complicated: Mutual funds can be simple to understand if investors do their research and choose the right fund that aligns with their investment goals.
Mutual funds are only for long-term investments: Mutual funds offer flexibility, and investors can choose from short-term or long-term investment options, depending on their investment goals.
Facts about mutual funds:
Mutual funds are regulated by SEBI: Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which ensures that mutual fund investments are transparent and secure.
Mutual funds offer diversification: Mutual funds offer diversification by investing in a range of stocks and bonds, which helps to mitigate risk and volatility.
Mutual funds offer professional management: Mutual funds are managed by professional fund managers who have the expertise and experience to make informed investment decisions.
Mutual funds offer tax benefits: Some mutual funds offer tax benefits under Section 80C and Section 10(38) of the Income Tax Act, which can help investors to save on taxes.
Mutual funds offer convenience: Mutual funds offer online investment platforms and mobile apps, which make it easy for investors to invest, track their investments, and manage their portfolios from anywhere, anytime.